Pertamina gets Rokan oil block from Chevron. What does this tell us?

Indonesia has decided that state-owned oil and gas firm Pertamina will take over the Rokan block, in Riau, from Chevron when the US energy firm’s operating contract expires in 2021. www.shutterstock.com

Indonesia’s decision that state-owned gas and oil company Pertamina will take over one of the country’s most productive oil blocks from US energy firm Chevron shows a push towards a nationalist agenda ahead of the country’s presidential election in 2019.

But despite this shift towards protectionism, Indonesia under President Joko “Jokowi” Widodo still practises a mixed model economic policy.

The precious Rokan block

Chevron is a major oil producer in Indonesia and has operated the Rokan block in Riau on the island of Sumatra, one of the country’s most strategic oil blocks, since 1931. Its contract with Indonesia will end in 2021. Under a regulation, Chevron is able to request an extension. However, the government decided to reject the request and gave the block to Pertamina as the state company came up with a better offer.

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Major oil producer companies 2017. PricewaterhouseCoopers

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Pertamina claimed that the deal could help Indonesia save US$4 billion a year in oil import spending and cut downstream costs in the long term. The acquisition will also improve Pertamina’s upstream and downstream businesses.

However, concerns are growing over the Indonesian government’s decision to give the oil block to Pertamina.

Some have claimed that the decision lacked transparency. Global financial services company Moody’s Corporation was pessimistic about the deal. It said the deal would become too much a burden for Pertamina as it required the company to spend $70 billion over 20 years.

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www.katadata.co.id, Author provided

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The nationalist agenda

The Rokan block deal tells us that the Indonesian government is pushing for an inward-looking economic policy. Such a policy tends to limit foreign direct investment and to impose tariff and non-tariff barriers to support national economic interests.

Previously, the government, via its mining holding company PT Indonesia Asahan Aluminium (Inalum), clinched a deal with US giant miner Freeport-McMoran to buy 51% of Freeport Indonesia’s equity. The deal gives Inalum’s control of the world’s largest gold mine, the Grasberg mine in Papua. However, many have doubted its capacity to manage the mine.

The sentiment against liberal economy policy within Indonesia’s society and the global economic slowdown have motivated the government to implement such inward-looking economic policies.

This nationalist agenda is very strategic for leaders to secure votes. President Jokowi is seeking a second term in next year’s presidential election.

To support his candidacy, Jokowi seems to have promoted his nationalist agenda. The Freeport and Rokan block deals are examples of how he defended national interests in strategic sectors.

Political scientist Eve Warburton, from the Australian National University, said the nationalistic agenda under Jokowi was a “new normal”.

Indonesian leaders tend to come up with populist and protectionist agendas to secure votes. These agendas include fuel and electricity subsidies as well as cash for poor people.

These policies were adopted under Jokowi and former president Susilo Bambang Yudhoyono.

Jokowi’s mixed model

Jokowi’s economic policy, however, is not purely nationalistic. Some of his economic policies have been driven by an outward-looking strategy as well. An outward strategy promotes foreign investment and privatisation to spur economic growth.

While protecting national interests in Rokan blocks and Freeport mines, Jokowi also pushes for foreign direct investment in infrastructure projects. Having both strategies in place, Jokowi’s economic policy is a mixed model.